Europe’s Auto Sector Is Cheap. Get Ready for a Rebound.
The global semiconductor shortage has made this year a tough one for the European auto industry but it also makes the sector a potential buying opportunity heading into 2022.
Chip supply issues have forced production cuts at the world’s largest car makers, with many seeing problems continuing into 2022. European car sales hit a record low in October, according to the European Automobile Manufacturers’ Association.
It’s not just sales that are flirting with lows; it’s valuations too. The MSCI Europe Automobiles and Components index currently trades at 6.8 times forward earnings, not far off record lows of 5.2 times in April 2020, and well below the 14.6 times for the wider MSCI Europe index.
Investors may need patience, though, as the first half of the year is likely to be plagued by chip shortages and production woes. The issues will subside at some point, and the recovery will then take hold, auto makers and analysts say.
Morgan Stanley strategists, led by Graham Secker, named autos as their ‘top cyclical value pick’ but cautioned that the near-term is uncertain. Still, “the sector is likely to see easy comparables and good EPS momentum roll into 2022,” they said.
JPMorgan analysts see global production recovering in the second half of 2022, at which point suppliers “should clearly outperform” car manufacturers. French car parts supplier Faurecia (ticker: EO.France) is a top pick due to its strong exposure to fast-growing regions, such as China, and customers like major manufacturers Tesla (TSLA) and Stellantis (STLA). The bank has a 60 euro ($67.89) target stock price, a 54% gain from a recent price of €39.48.
Shares have fallen 18.5% in the past month as the threat of the Omicron variant hit the sector, and Faurecia issued a second profit warning, citing downward revisions to automotive production in Europe. Deutsche Bank analysts, which also have Faurecia as one of their European top picks for 2022, said the outlook was “relatively de-risked” following the company’s warning. “We continue to see Faurecia as well positioned to capture volume upside,” they said. Deutsche Bank’s Christoph Laskawi has a €50 price target with a Buy rating.
Faurecia, with a market value of €5.4 billion, employs more than 114,000 people across 266 industrial sites and 39 R&D centers in 35 countries. The company estimates that one in three vehicles in the world use its technology.
The company’s merger with German automotive lighting group Hella, expected to close in early 2022, may be a trump card in the investment case. The acquisition will create the world’s seventh largest global automotive supplier, according to Faurecia. Still, the merged entity trades at 8.1 times estimated 2022 earnings, a 30% discount to peers, UBS analyst David Lesne noted.
“The Hella deal upside is not priced in, in our view, as the merged entity currently trades on a sharp discount,” he said. “Delivering on the synergies (not reflected in our estimates) could provide further upside.” The deal also helps Faurecia reduce its exposure to sales of internal combustion engines from 25% to less than 10% by 2025.
Traditional car manufacturers still stand to benefit from the volume recovery and ought not to be ignored. Volkswagen (VOW3.Germany), which Barron’s highlighted in this column in September as a buying opportunity, remains a good option for investors.
The stock has fallen 25% from 2021 highs reached in April, and its recent price of €184 looks attractive, particularly when the German auto maker’s ambitious electric vehicle plans are factored in. Analysts have an average target price of €249.52.